Cloud Accounting Xero

Online Accounting Software Types, Which Should You Use?

Written by Greg Lam

There are many different types of online accounting software out there, what type should I use for MY business?

Choosing Online Software Accounting TypesTo help answer that, let me first briefly talk about the evolution of personal computing. The very first computers used by both consumers and businesses were desktop computers, and they were the mainstay of personal computing for many years. Next came laptops, then came the smartphone, shortly followed by the tablet. These devices have expanded what you can do with a computer and changed how you use one. As the devices became smaller and with the advent of the Internet, work suddenly became mobile, allowing knowledge workers to ply their trades from anywhere, at any time.

Accounting software has undergone this same shift. From pen and paper, to spreadsheets, to desktop accounting software. And now there’s the cloud and the term online accounting or cloud accounting software. A new problem that has arisen is that a lot of software related to small business accounting falls under the umbrella category of online accounting software. However, just like there are many types of computing devices (desktop, laptop, tablet, smartphone), there are many types of online accounting software as well. Some are better suited for certain functions and types of businesses than others.

Online Accounting Software Types

My task today will be to help you navigate the different types of online accounting software so that you can choose which one is the best fit for yourself or your clients.

As I see it, the six main types of online accounting software are:

Most online accounting software has certain “core” features such as posting to the general ledger. Each product, though, can have additional capabilities, such as inventory, expense management, project management, payment processing, payroll, and so on. Part of the big difficulty in navigating the complicated waters of software for your business’ accounting needs, is that there is a lot of crossover in functionality between these different products. There’s also a huge difference between users, from the big picture accountants, to the detail oriented bookkeepers, to the get-this-done-so-I-can-do-something-else small business owners. Lastly, what works well for an owner-operated business probably won’t work so well for the small business with 25 employees.

So, I’ll start off describing personal software and work my way up to enterprise software.

Be aware: The examples of software are just that, only examples, they aren’t a comprehensive list of all the software of that type. Additionally, some software could fall into a couple types. There is no hard and fast rule for types and examples, they’re there simply as guidelines to aid in your software making decision.

Personal

Examples:

Ideally suited for:

  • Company Size: 1
  • People using the software: Owners
  • Special capabilities: Being able to track income and expenses
  • Cost: Free to $10 a month
  • Setup: A couple hours
  • Ease of use: This type of software you pick up on the fly

This really isn’t business software, but it’s in here to help make the distinction that it isn’t. Look, you’re reading this on an accounting software consultant’s blog, so there’s we’re not really going to recommend this type of software for business use. However, we do recognize that this is where some small business owners start, either because they’re familiar with the software from having used it for their personal finances or because it seems similar enough to business accounting software.

The pros are that it makes finances fairly simple. Enter an expense, enter some income. There’s not much in the way of assets, equity and liabilities. If you’re doing a very small “hobby” business, with only a few entries a month, maybe it’s something you can get away with doing, as long as you are very organized as to what’s business and what’s not. But really, it’s not recommended.

The cons are that this is not double-entry accounting software, which is another way of saying is that it’s not software you can use to enter debits and credits in a general ledger, which is a fundamental requirement of accounting software. So a bookkeeper or accountant would probably never use this type of software.

Expense

Examples:

Ideally suited for:

  • Company Size: 1-10 (although larger companies would find this type of software useful for their employees)
  • People using the software: Owners / managers, bookkeepers, employees doing expense entries
  • Special capabilities: Receipt capture, tracking and payment of bills, time-tracking, re-billing
  • Cost: $10-$50 a month (depends on software / number of users)
  • Setup: A couple hours.
  • Ease of use: This software is fairly straightforward and easy to use

The goal of this software is to capture expenses.

The pros are that these are very specialized on the expense side of your business financials. The software is generally simple and easy to use, yet has many handy features that micro-business or small business accounting software may not have, like being able to capture receipts, pay bills, and track time.

The cons are that they are not full featured accounting software. Don’t think that you’ll be using this type of software to do your books. Rather, it’s a component, a piece – or as we’d like to say – a chunk, of what’s needed.

Look for expense software that can be integrated or exported to fully functional accounting software and remember that this software is only one piece of your small businesses accounting needs.

Invoicing

Examples:

Ideally suited for:

  • Company Size: 1-10 (although larger companies would find this type of software useful for their employees)
  • People using the software: Owners / managers, bookkeepers, employees doing invoice entries
  • Special capabilities: Project management, tracking and payment of invoices, re-billing expenses, time-tracking, payment processing
  • Cost: $10-$50 a month
  • Setup: A couple hours
  • Ease of use: This software is fairly straightforward and easy to use

The interesting thing about invoicing software, is that it’s generally more broadly focused than expense software. They can handle expenses as well as invoicing, but of course the specialty is invoices. This software can be quite handy for service-based business that deal with projects, where they have to track time and expenses in order to bill their clients.

The pros are that they make invoicing easy and have advanced functionality that the micro-business and small business accounting software sometimes don’t have.

The cons are that they are not true accounting software, despite being able to track expenses. They are usually missing the concept of accrual accounting, control over the chart of accounts, account reconciliation, and the ability to post directly to the general ledger.

Look for income software that can be integrated or exported to fully functional accounting software and remember that this software is only one piece of your small businesses accounting needs.

Micro-business

Examples:

Ideally suited for:

  • Company Size: 1-5
  • People using the software: Owners / managers, bookkeepers, employees doing invoicing or expense entries
  • Special capabilities: They have the basics of fully functional accounting software (double-entry accounting, accrual-based, chart of accounts, account reconciliation, and tax tracking). Extra capabilities that they can sometimes handle, whether natively or via add-ons are are things like payment processing, payroll, and inventory.
  • Cost: $0-20 a month
  • Setup: Setup can take up to half a day
  • Ease of use: You can simply start using the software, but to get full use, you’ll want to go through and set up your chart of accounts, opening balances, the items you’ll be invoicing and expensing, your taxes, and your customer and vendor lists.

This is kind of a new software type, wedging itself between personal software and small business accounting software. The goal of this software is ease-of-use while still being fully functional accounting software.

The pros is that the software is generally friendly to the average small business owner. Things are simplified and the functionality is limited to the core needs of the small business owner.

The cons are that it’s simplicity and narrow scope of functionality means that as a business grows, what used to be simple and easy can start becoming difficult and inefficient. There’s also use cases where a small business has specialized needs, like inventory management, integration with a POS system, or re-billing of expenses, where this type of software really isn’t always up to those tasks.

The software in this space is rapidly evolving and features that weren’t there yesterday may be there tomorrow. One of the big differentiating factors between micro-business and small business accounting software is that the small business software has more focus on their integrations partners (i.e. third-party add-ons). This means that if you’re looking to use your accounting software with other software, you’re most likely, but not always, better off going with small business accounting software.

Small Business

Examples:

Ideally suited for:

  • Company Size: 5-25
  • People using the software: Owners / managers, accountants, bookkeepers, employees doing invoicing or expense entries. Multiple people with various roles
  • Special capabilities: They have the basics of fully functional accounting software (double-entry accounting, accrual-based, chart of accounts, account reconciliation, and tax tracking). Extra capabilities that they can sometimes handle, whether natively or via add-ons are are things like payment processing, payroll, inventory, project management, re-billing of expenses. They have more emphasis on being a platform to integrate with other software. They have special tools for accountants and bookkeepers that help them manage their clients.
  • Cost: $20 – $70 a month
  • Setup: Half to full day
  • Ease of use: Best practice is to first set up the chart of accounts, opening balances, items being invoiced and expensed, taxes, and customer and vendor lists. Additionally, integrations or extra services may need to be set up, like payroll, payment processing, or inventory.

This software, while sometimes being advertised to the small business owner as easy-to-use or the solution to all their business needs, is really more a tool to be used by accountants or bookkeepers to work with small businesses. The complexity starts to become enough that it’s best used with the guidance of an accountant or bookkeeper, even if they are setting it up, doing some initial training, and then doing a yearly review and adjustment of the books.

The pros of this software are that they really are a great collaboration tools between accountants, bookkeepers, and their clients. Not only that, with the integrations, this software starts to become the hub of several business activities, like customer relationship management (CRM), project management, and e-commerce. Never before has the flow of data between these business areas been greater and more integrated. This means less data-entry, less errors, and better tools for smarter business decisions.

The cons of small business accounting software are that they are not quite there yet in terms of the pros mentioned above. Integrations can fail, in certain areas they are just not as powerful as their desktop counterparts, and the reporting and nuanced little details are not always there.

Enterprise

Examples:

Ideally suited for:

  • Company Size: 50+
  • People using the software: Owners / managers, accountants, bookkeepers, data-entry clerks, employees doing invoicing or expense entries. Multiple people with various roles
  • Special capabilities: They have the basics of fully functional accounting software (double-entry accounting, accrual-based, chart of accounts, account reconciliation, and tax tracking). Extra capabilities that they can sometimes handle, whether natively or via add-ons are are things like payment processing, payroll, and inventory.
  • Cost: $500 (but more like $1000) plus a month
  • Setup: Days. Requires custom setup and training
  • Ease of use: This is not the type of software you pick up on the fly. You are trained to use it. However, once you’re competent with the software,and because of it’s specialization and customization, using the software can be very powerful and efficient.

This software is geared towards the bigger small businesses. The business will most likely be generating millions in revenue to warrant software at this level. To get started with this type of software you usually have to contact a sales rep who will give you a personalized demo and custom quotation.

The pros of this software are it’s power. These can be tailored to your business’ exact needs and plug in with your other software systems. This type of software also allows for the greatest control over who in the company can do what, and can divide the software into silos, meaning that if you have an employee using it to issue invoices, they can have their own interface that just shows them invoicing, hiding the rest of the software from them.

The cons are the cost and complexity. These take time to set up and learn. If you’re a small business that’s growing out of the small business software, going enterprise can be quite a leap. There’s very little middle ground between the types of software.

 

Wrap-up

There is clearly an overlap between all the categories and this article is not meant to be a solid black and white breakdown of each software type. The types I feel have the most crossover are the micro-business and small business accounting software. The former is more focused on the small business owner (micro-business), whereas the latter on the bookkeepers and accountants. As both types of software develop we’ll see how they will continue to push up against each other for that market of companies who are 5-10 employees in size. I think the integrations (add-ons) are going to be a huge differentiator and those products that can develop an ecosystem around their platform will be better able to find continued success.

I also feel that there’s this uncomfortable gap between small business and enterprise accounting software. It’s such a huge jump to go from under a hundred dollars a month for your accounting software to what’s most likely to be $1,000+ a month. That’s a big leap. Will the small business accounting software scale up to meet this gap, or will the enterprise software come down?

I hope this guide was useful in giving you a frame of reference, for what’s out there and that sorting the software into types will make the task of choosing the right accounting software for a business just a bit easier.

As always, use the comments section below to discuss, refute, update, and fix what’s been said in the article above.


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About the author

Greg Lam

Greg Lam is a passionate small business guy who loves technology and automation. He holds a BBA from Simon Fraser University, Canada. He's a Certified QuickBooks ProAdvisor, Certified Xero Partner, and Kashoo MVP. His business interests are focused on online accounting and how it can be used to streamline and automate a company’s accounting processes. He currently lives in Tokyo, Japan.

Greg operates the Small Biz Doer website, an "Entrepreneur's Guide to Small Biz Bookkeeping." He is the author of Online Accounting Software: Finding the Right Match, published by The Sleeter Group.

Connect with Greg on Twitter, Google Plus, YouTube, LinkedIn, or Facebook.

20 Comments

  • Hi Charlie,

    Have you crossed paths with FrontAccounting? It’s top-rated on Sourceforce; free, open-source, and downloaded over 100k times. It’s got strong double-entry GL with strong reporting, multi-warehouse inventory management, purchase orders, etc.

    Scott

    • I’ve seen some references to that. Many businesses can’t work with open source accounting products, so I tend to not look at those in detail myself. I have never come across a business that is using it already, but that doesn’t mean much.

  • Nice classification of all accounting tools. Covered almost everything on the planet. I’m a freelancer and I use Invoicera – just sharing…

  • Great summary Tom.

    I particularly agree with your assertion that there is `an uncomfortable gap between small business and enterprise accounting software` and it isn’t just price, it is also feature sets and system limitations that separate the two.

    As part of Gem Accounts, I can let you know that this wide open gap was the market that we built Gem Accounts for. So although you listed Gem in the Small Business section, we would actually belong in that `Mid Market’ space you allude to.

    For us that mid market space is where accounting software should be offering fully featured, double entry accounting software with everything an accounting would expect. This mid market space would also expect to pay more for this software as it would be fully featured and not have system or performance limitations. At more than double the price of those cloud accounting software products listed under Small Business, and with an extensive feature set designed for bigger businesses, Gem sits in a different tier.

    It may be difficult to establish this `Mid Market’ as a distinctly different tier to Small Business or Enterprise, but in our experience there are a great number of companies that associate with being too big to use the small systems but unable to afford the enterprise systems – so hopefully over time others will join us and whole new market segment will be established to help those mid sized companies to gain access to the benefits of great cloud software.

    So to answer your question as to whether the small guys will scale up or the big guys scale down, my view is that:
    – the small business software guys are in a race to get market share of small businesses, there are a heap of them, so that should keep them too busy to focus on this space, so I see that as unlikely.
    – the Enterprise guys can come down a tier, but quite often their models are wedded to the cash flow of professional services, so they would need to adapt a new model. This is more likely than the small guys moving up in the short to medium term.
    – but really I believe a new breed of software companies will step into this mid market space to deliver high value software at a reasonable price. It is a growing part of the economy, and it is the aspirational space for most small business – who doesn’t want to grow their small business to a mid/large sized business?

    Thanks.

      • No problems Greg.

        If you would like, we would be happy to give you a walk through the product with a run down on features, functions & product direction, as well as where we fit in the market.

        You should have access to my email from my account that allows me to post comments here.

        Cheers,

        Brad

          • Hi Greg,

            We have coined a term that we think resonates with businesses in that mid market space that helps separate them from the small businesses:

            MMEs for Mid Market Enterprises.

            We are all familiar with the term SME; MME is a natural progression from there.

            At Gem we believe that an MME has very different needs to a small business. While a small business might do some bookkeeping in house and have an external accountant, a MME would likely have an accounts team withe separate functions.

            A small business might not be too concerned about the process of approvals from a PO to an invoice – but a MME may need defined roles within the software to manage different approval levels.

            Another major point of difference in accounting software from a small business and a MME is in the speed and reliability of the software, and the transaction limitations. An MME simply cannot get by on the transaction limits in place with the majority of small business focussed accounting systems.

            There are myriad reasons why a small business and a MME is different, trying to group them all together under the umbrella of a SME is to discount that difference and therefore attempts to force a larger business into the functional and transactional limitations of a smaller software package. Doing so can seriously hamper the productivity of a MME.

    • Hi Kevin,

      That’s a great question, and one that I can’t completely answer. Maybe some others can pipe in and say.

      From what I’ve seen, there are a few things I can point out:

      1. Volume of transactions / size of lists (database). There’s only so many transactions a month, or lists for items or contacts can only be so big before the system just doesn’t work. There are also limits to the number of calls on an API that can be done. A workaround is to let an add-on carry some of this weight, like an add-on for inventory, e-commerce, or CRM. When it sends information over to the small business software, it’s summary data, like a completed invoice in the case of inventory or daily sales in the case of e-commerce.

      2. Customization. Some business need things a certain way, whether it be tax accounts, a/r or a/p accounts, invoice customization, report customization, etc… When you’re going with small business software, there’s a limit to what you can control. The small business online accounting software vendors are still focused on getting what people consider “core” functionality done.

      3. Advanced functionality that’s integrated. Some businesses don’t want to or can’t deal with a variety of add-ons. They want all the functions available within one package, and Enterprise is better able to do this.

      4. Price. it’s a big jump from sub-$100 a month for the small business software to a point that starts closer to $1,000 a month for Enterprise software.

  • I would have added QuickBooks Online in the Microbusiness category as well as the Small Business.

    I have a number of Solopreneur and small business clients in Seattle who use the one user version (Simple Start), three (Essentials), and the all powerful five user Plus that comes with the ability to bill and track by class and location (something desktop can’t do).

    One thing I have noticed is that you can supposedly get it in up to 25 licenses. I wonder what that is all about?

    • Hi Keith, I think you’re right, it could fit into the Microbusiness category as well. The categorization wasn’t hard and fast, just a framework for helping understand the different types of software.

      Additionally, there’s many vendors who were not included in the examples, so there’s a lot more than the few companies that I mentioned.

  • Thank you so much for this article! I have been looking to switch my accounting software for a while and after way too many hours looking at different software and articles on the subject, I finally came across your article. It is the best breakdown and explanation I have seen, and I now know which one I am getting.

  • Very good article Greg.
    Just one suggestion – if the discussion is about “online” (as opposed to pure SaaS) I’d have included QBES running on a private virtual machine. I think this is a great fit in the upper SMB/lower Enterprise space.
    I think it offers more functionality and flexibility than say QBO or Xero without the relatively high cost of say NetSuite or Acumatica.

    • The intent here is to look at SaaS products. QBES on a shared system is providing the features of the desktop product, and we have plenty of articles discussing the desktop product. Also, looking at that, we would then get into some issues that are unique to that environment. Shared vs Dedicated servers, problems with some add-on products in some of these environments, a long list of issues that we don’t see in the SaaS environments.

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